Occupational Fraud: Executive Compensation and Enforcements Against Auditors and Perpetrators.

This dissertation is comprised of three studies that examine the association of executive compensation with financial statement fraud and enforcements pursued against the independent auditor and the principal perpetrators when occupational fraud is detected. The first study examines competing, though non-mutually exclusive, hypotheses for the path that equity compensation follows on its way to financial misreporting. We find that firms that experience financial statement fraud pay their executives higher levels and a higher proportion of equity compensation across the entire executive’s tenure. This starts in the first year of an executive’s tenure and continues up until the fraud period. These findings hold across executive roles and pay rank. We find some evidence that executives who perpetrate fraud have idiosyncratic compensation preferences and negotiate different pay packages compared to other executives in the same firm. We find this only for option grants during the latter years of executive tenure. Finally, we find differences in how executives who perpetrate fraud manage their portfolios. They sell far less of their accumulated equity during their tenure than other executives in the same firm who do not perpetrate fraud. The second study examines whether the U.S. Security and Exchange Commission’s auditor related findings, namely charged, silent or concealed, are associated with fraud scheme characteristics, as argued under an outcome-penalty accountability framework. The results indicate a weak association between the fraud characteristics and the SEC’s auditor related findings. Collusion among perpetrators and asset misreporting fraud schemes increase the probability of the SEC charging the auditor, as compared to the probability of being silent. Whereas the perpetrator’s executive position decreases the probability of the SEC charging the auditor, as compared to the probability of being silent. Overall, only a few fraud characteristics affect the SEC’s auditor related findings, which is not consistent with the outcome-penalty accountability framework. In contrast, the auditor type, being a Big-N auditor or not, significantly affects the SEC’s findings. The SEC is more likely to remain silent or find that the fraud scheme is concealed for Big-N than non-Big-N auditors, as compared to charging the auditor. Thus, this evidence is more consistent with a process-reward accountability framework. Lastly, study three examines the impact of fraud severity and the perpetrator’s status and organization type on the victim organization’s outcomes pursued against the principal perpetrator. We find that as fraud severity increases, the severity of the outcome pursued against the principal perpetrator increases as well. Supporting status characteristics theory, we also show that perpetrators of different social statuses receive differing levels of punishment. Specifically, victim organizations pursue less severe outcomes against a perpetrator with a high status as compared to a perpetrator with a low status when the duration of the fraud is short. As the fraud duration increases, however, victim organizations pursue equally severe outcomes against all perpetrators. Lastly, governmental, not-for-profit, and privately held organizations are more likely to pursue no outcome than to terminate the principal perpetrator, as compared to publicly traded organizations